Patent Trolling Emerging as a State Legislative Issue

Published February 27, 2014

A new effort is underway in state legislatures across the country to curtail the efforts of “patent assertion entities” (PAEs), commonly referred to as “patent trolls.” PAEs are companies that use patents for the express purpose of filing patent infringement lawsuits against individuals or businesses to obtain licensing fees or a legal settlement rather than actually supporting or developing any products.

PAEs approach small- to medium-sized businesses alleging patent infringement through letters threatening litigation and demanding payment for licensing fees. Often, these entities create shell companies making it difficult for individuals and companies to know who is threatening them. Their targets have included CPA firms and state CPA societies.

The PAEs’ claims are made in bad faith and are based on overly broad patents related to common business practices and technologies. According to a 2013 report prepared by the President’s Council of Economic Advisers, the National Economic Council, and the Office of Science & Technology Policy, suits brought by PAEs have tripled in just the last two years, rising from 29 percent of all infringement suits to 62 percent of all infringement suits. Estimates suggest that PAEs may have threatened over 100,000 companies with patent infringement in the last year alone.

Congress is currently pursuing a solution to this problem at the federal level. The House of Representatives passed a bill in December 2013 that was strongly supported by the American Institute of CPAs (AICPA), and a similar bill is pending in the Senate Judiciary Committee. While a federal solution to the problem would be ideal, some states are moving swiftly to stop PAEs. Last year, Vermont Governor Peter Shumlin signed legislation prohibiting a person or company from making a bad faith assertion of a patent infringement. Vermont’s law also created a cause of action for damages. To date, 23 states are considering similar measures this year. They are Alabama, Connecticut, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maryland, Maine, Missouri, Mississippi, Nebraska, New Hampshire, New Jersey, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah and Virginia.

Many state CPA societies are actively supporting these bills this legislative session. For example, members of the Virginia Society of CPAs highlighted the impact PAEs have on the profession during the society’s lobby day in January. “Many of our members were getting hit by this,” commented Emily Walker, the Society’s Government Affairs Director. “They don’t have the resources to fight these lawsuits on their own. The legislation under consideration by the Virginia General Assembly provides a much needed solution to the problem.”

The AICPA State Regulation and Legislation Team will continue to monitor this issue at the state level, while the AICPA Congressional and Political Affairs Team will continue to work on this issue at the national level. For more information about legislation in the states, please contact James Cox at jacox@aicpa.org. For more information about legislation at the federal level, read the story in the January 2014 issue of The CPA Advocate.